Markets appear to have made up their mind about the US election. The US dollar/Mexican peso exchange rate is back to its medium-term trend and in fact looks like falling below it.
Traders have adopted the dollar/peso pair as an election trading proxy because Donald Trump’s policies are seen as damaging to the Mexican economy. Renegotiating or abandoning the North American Free Trade Agreement (NAFTA) would be a serious blow to Mexican industry. Repatriating illegal immigrants from the US would reduce the income of many Mexican families and put a strain on the country’s social services expenditure.
In response to all this, the peso began to fall (as the US dollar rose) in April. However, USD/MXN peaked in mid-September and fell heavily after the Trump tapes were released. Selling gathered momentum this week and today’s final presidential debate has not turned things around.
Of course, this exchange rate is not just about the election. There are plenty of other influences, not least of which is the looming US Federal Reserve rate hike. However, as the chart below shows, USD/MXN, which began to outperform the US dollar Index in April, has now lost all this outperformance and some. Rightly or wrongly, markets now seem to be largely discounting a Trump victory.
This coincides with the current situation where USD/MXN is approaching a medium-term trend support, including its 200-day (40 week moving average). The slow stochastic in the box below the chart confirms that the dollar is hitting this support with a fair bit of momentum. It’s also still well outside its oversold zone. That implies that a clear break of this support could see the downtrend extend further, and one possibility would be the 78.6% Fibonacci retracement around 17.66.
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